Belgium, France Give Dexia $7 Billion, Charge Less for Guarantee

By John Martens and Fabio Benedetti-Valentini -
Nov 8, 2012

Belgium and France, wrestling for
more than a year over the second rescue of Dexia SA (DEXB), agreed on a
5.5 billion-euro ($7 billion) recapitalization of the bank and
will charge the bank less for its government funding backstops.

Belgium will buy about 2.92 billion euros of preferred
shares with dividend priority over common stock and France will
cover the remaining 47 percent, the Belgian and French finance
ministries said today in separate statements. The two states
will hold 92 percent to 93 percent of Dexia’s voting rights and
don’t plan to buy the remaining shares, Dexia Chief Executive
Officer Karel De Boeck told reporters in Brussels.

Dexia, which was rescued with taxpayer funds a first time
in 2008, last year became the first casualty of the sovereign-
debt crisis at the core of Europe. While France and Belgium
rushed to protect their local units last year, hurdles to an
agreement remained as they tussled over responsibility for
assets hit by the fiscal turmoil that caused the bank’s short-
term funding to evaporate.

“You’ve got to absorb losses,” said Francois Chaulet, who
helps manage 250 million euros at Montsegur Finance in Paris and
doesn’t own Dexia shares. “Still, you could hardly say that
Dexia’s difficulties, its issues with municipalities, are any
closer to being over.”

Today’s agreement also involves a reduction in the
commission Dexia pays for as much as 85 billion euros of state
guarantees. The bank will pay a monthly fee on outstanding
government-backed debt at an annual rate of 5 basis points, down
from 90 basis points on temporary guarantees of as much as 55
billion euros.

Commitment Fee

Belgium’s share of the backstops will drop to 51.4 percent
from 60.5 percent currently, while France will back 45.6 percent
of the guarantees, up from 36.5 percent, according to the
statements from the two finance ministries. Luxembourg
guarantees the remaining 3 percent. Belgium will also receive
the remaining 79.5 million euros of the commitment fee Dexia had
to pay for its temporary guarantees.

Dexia has tapped about 73.8 billion euros of the state
guarantees, including backstops from a 2008 agreement, according
to data compiled by the Belgian central bank. The bank was still
clinging to 8.2 billion euros of emergency central-bank loans on
Oct. 30 even as an increase in benchmark long-term interest
rates freed up 1.3 billion euros of collateral posted to
counterparties in derivative contracts during the third quarter,
Dexia said in a statement.

Finally, Dexia said today it won’t have to provide a
guarantee covering potential losses on 9.4 billion euros of
structured loans with French municipalities that are on Dexia
Municipal Agency’s balance sheet.

Equity Wiped Out

The planned sale of Dexia Municipal Agency, including its
structured loans, to a new French municipal lender to be set up
by the French state, Caisse des Depots et Consignations and La
Banque Postale would reduce Dexia’s borrowing requirements by
12.5 billion euros.

Dexia said it needed additional capital after its statutory
equity was wiped out following a “significant” writedown of
the carrying value of its French unit Dexia Credit Local.

The bank, which reported a 1.23 billion-euro net loss for
the third quarter, plans to transfer the funds received to Dexia
Credit Local “in order to increase the core equity in
accordance with French accounting and prudential standards,”
according to the statement.

Belgian Debt

Dexia’s consolidated core Tier 1 ratio improved to 8.5
percent on Sept. 30 from 6.2 percent at the end of June as risk-
weighted assets fell 25 percent to 65.6 billion euros following
the sale of Denizbank AS and the 50 percent stake in RBC Dexia
Investor Services.

Belgium doesn’t plan any additional debt sales to finance
its share of the recapitalization, Jean Deboutte, director of
strategy and risk management at the Belgian debt agency, said by
telephone. Deboutte said Belgium has already raised more money
from bond sales than actually planned and will proceed with its
regularly scheduled bond auction on Nov. 26, the last one of the
year.

While the Dexia injection will inflate Belgium’s public
debt, it won’t have a negative effect on the budget deficit,
Belgian Finance Minister Steven Vanackere told reporters in
Brussels.

The governments anticipate the recapitalization deal, which
needs approval of Dexia shareholders and European Union
regulators, will be concluded by the end of the year. Dexia
shareholders may meet on Dec. 21 to approve the government
transaction, De Boeck told reporters.